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Yves here. This is one of the few proposals I have seen on how to move BRICS forward with the goal of reducing its members’ use of dollars in trade. Note that crypto-blockchain whiz bangery is not part of this, although it can be grafted on to sex appeal. This is still a viable bilateral trade system, but the use of a centralized currency is expected to reduce transaction costs, as it did with the ECU. As this article shows, the ECU was first traded and even used as a bank depository. Private companies do not trade on a large scale but apparently enough to provide prices that are seen as reliable, but that did not happen quickly. I spent the summer of 1984 (the ECU was launched in 1979) dealing with the treasury function of Citibank of London, including its foreign exchange trading, which at the time was the largest in the world. ECU trading was so de minimus that it was not worth thinking about at the time.
Note, there is a fundamental contradiction here that is rarely acknowledged. The main appeal of BRICS is increasing national sovereignty. This article points out that the ECU is now considered a stepping stone towards a common currency, where any advocate of MMT or observer of the EU monetary rules or watcher of the ECB will tell you that it will represent a huge loss of national sovereignty if BRICS goes there. . Although Michael Hudson has highlighted a bancor-type system as an alternative, that also involves losing national sovereignty. The main purpose of the banking system is to force balanced trade by imposing penalties on both trade surplus and deficit countries. But a country with a surplus in trade faces more severe sanctions. Mercantilism has long been the most popular economic strategy as it equates to taking demand from trading partners. Countries like China that see their surpluses as a result of technological innovation and investment are likely to reject this type of restriction.
By Nicholas Shubitz, independent BRICS analyst. Originally published on BusinessLive; Cross posted to InfoBRICS
The deputy foreign minister of the Russian Federation, Sergey Ryabkov, said that under the Russian leadership of BRICS in 2024, this organization should consider creating a type of coexistence similar to the European currency unit (ecu) that served as the predecessor of the euro. .
He clarified that he is not proposing a common currency but is proposing a clearing account unit that will reduce the costs associated with converting foreign currencies.
The ecu was a basket of currencies used as the European Community’s unit of account before it was finally replaced by the euro in 1999. Despite its official role in the European Monetary Union, a private market for the ecu developed, allowing its use. in cash transactions and financial instruments including bonds.
Unlike the euro, the ecu was simply an electronic unit of account with no official coins or notes that could be used for monetary transactions (although some commemorative tokens could be used as legal tender produced in Gibraltar). The value of the ecu was based on a weighted basket of European currencies, the weight of which was determined by the relative size of each member country’s economy.
The ecu attracted bond investors because the currency-denominated bonds were better diversified than other European sovereign debt, which came with individual currency risk. The adoption of a similar program within the BRICS may similarly increase the demand for BRICS securities.
Another benefit of the ecu is that it helped reduce currency risk for European businesses. By using a single currency for financial transactions businesses can avoid some of the costs and risks associated with currency exchange. This may benefit the Brics as forex costs can account for 3%-5% of international trade.
A reduction in costs associated with currency volatility (including the need to buy derivative contracts to hedge against currency fluctuations) could help boost trade between the Brics. Combined with the ability to create bonds in the various joint account units, these advantages make the ecu-based Brics currency an attractive proposition.
Balance of Trade
At the Bretton Woods Conference in 1944, British economist John Maynard Keynes proposed the adoption of a new currency that he hoped would address imbalances in global trade relations. Although his proposal was ultimately rejected, the idea remains particularly relevant today, as trade imbalances emerge as a source of political tension.
Keynes proposed that a supranational unit of account (bancor) be used within a multilateral clearing system to settle international trade. Although individuals will not hold or trade money, all international transactions will be informed and cleared through bancor, with surpluses and deficits subject to penalties to encourage balanced trade.
The economists’ agenda may have been somewhat extreme, favoring balanced trade above all other considerations. However, if part of the trade between the Brics states was carried out under this system it could encourage countries like China to buy more goods from countries with which it has a trade surplus, with obvious benefits for other Brics members.
This will solve one problem with the Brics membership of South Africa since the country has a problem in trade with most of the Brics states since it has a lot of money in Western countries. Under a bancor-style system, if SA has a trade debt with Saudi Arabia because it imports Saudi oil, Saudi Arabia would have an incentive to use that money to buy goods from SA to avoid sanctions from the clearing house.
Alternatively, adjusting the weight of the Brics currency basket provides another way in which trade imbalances can be addressed within the bloc. Supporting the basket balancing of export volumes within the trade between BRICS may strengthen the currencies of BRICS regions running trade surpluses, improving the balance of trade between the respective member countries.
On the other hand, a balanced measurement, which does not take into account economic output or trade rates, would allow the Brics unit of account to be used without influencing trade dynamics. This could be attractive to countries like China and Russia, as their trade surpluses within the BRICS would not be affected by the use of the new currency, while still providing clear benefits to the smaller BRICS countries by increasing demand for their currencies.
Suggestions that the Brics might use a system similar to the ecu are more interesting when one considers that before the introduction of the euro, the ecu already had an international status as a global reserve currency, with central banks having the ecu within their forex funds.
The adoption of a similar approach within the BRICS will give central banks the opportunity to separate their reserves from the BRICS (BRC) reserves. Based on a basket of Brics currencies, the BRC will be more stable than the individual Brics currency, making it attractive to major banks, while the New Development Bank can issue BRC bonds to raise funds to develop infrastructure projects in member countries.
With the balance between food and energy importers and exporters within the BRICS and trade relations between many members, there is a low degree of correlation between BRICS currencies. This may make the Brics unit of account (based on a weighted basket of Brics currencies) more stable than the ecu, which still comes with a concentration of geographic risk due to its exposure to Europe and intra-European trade. The stability of the Brics unit will also be supported by China’s exchange rate control and Saudi Arabia’s dollar peg.
Trade efficiency, reduced currency risk and greater access to development finance provide benefits to the BRICS that make the adoption of a common unit of account such as the ecu an exciting prospect. That such a currency can be used as an alternative global reserve currency is another advantage.
Although the trade imbalance between members makes a joint unit more attractive than switching to a domestic currency, it is unlikely that this important problem will be solved, and it remains to be seen whether the organization will be able to implement its ambitious proposals.
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